For those seeking to make the most of their hard-earned cash, knowing where to get started can be a daunting exercise in itself.

Self-directing your investments and assets can take a lot of time, effort and research and the financial services industry often appears to speak its own language.

Equally, you will have specific financial goals and, depending on what these are, you’ll need to determine your own appetite for investment risk. Given all this, it is not surprising many people seek professional financial advice.

This advice can come from a variety of sources but the two most common are financial advisers or planners and private wealth managers. The differences between the two are a well-trodden topic of debate as each can cover similar areas when it comes to financial management.

What the FCA says

According to the Financial Conduct Authority (FCA), a wealth manager is a firm or individual that manages a customer’s money or investments on either a discretionary or an advisory basis.

Discretionary wealth management involves passing the responsibility of managing your money to a wealth manager. They will make investment decisions for you, in line with your goals, without having to consult you first.

An advisory wealth manager on the other hand will make recommendations based on your specific circumstances and goals but refer to you before any change is implemented. Either way, the firm is responsible for ensuring your investment portfolio is suitable for your objectives and risk appetite. Wealth management may involve either bespoke portfolio construction or model portfolios with different risk profiles.

Financial advice is generally associated with a ‘whole of life’ offering so will include advice on investing, insurance, pensions, saving for children and other more personal goals. Under the adviser umbrella there is also a distinction between a financial planner and a financial adviser.

Generally speaking, an adviser will recommend products as solutions to a specific issue, while a financial planner will take a more holistic view of your needs and make recommendations with a view to meeting those goals.

Are you building wealth?

Perhaps a helpful whilst wide distinction is that financial advice is generally for those who are building their wealth and can include other elements, such as mortgages or insurance recommendations. Wealth management, on the other hand, tends to target those who have already accumulated money and need advice in more of a caretaking capacity.

With this in mind, there are many services each might offer and it might be helpful to focus on some of these. This is a basic overview and we’d encourage you to discuss service options with any wealth manager or financial adviser to see which might best suit your needs:

1. Financial planning – the most commonplace activity in financial and wealth management planning is cashflow modelling. Cashflow modelling, in its simplest form, is the process of assessing your current and forecasted wealth, along with inflows (income) and outflows (expenditure), to enable a picture to be created of your finances both now and in the future.
2. Product and tax advice – this is where professional advice really comes to the fore as different products will have different tax implications depending on an individual’s tax band. ISAs and VCTs (venture capital trusts) for example, carry some tax relief and other investment will attract capital gains tax (CGT). One thing to bear in mind here is that some advisers will be independent and some restricted. The former will be able to offer a wide variety of products whereas the latter will be limited to offering products from certain providers. It is important also to decide whether you are looking for advice across your whole finances or simply on a selection of your investments – some advisers might specialise in the latter.
3. Investment management – the key difference when it comes to managing your investments, as alluded to above, is whether help is offered on an advisory or discretionary basis. Essentially, are you happy being recommended investments or would you prefer your investments to be decided for you. Wealth managers are more likely to offer a discretionary service, whereby they take on the responsibility of managing your money. They will make investment decisions for you, in line with your goals, but without having to consult you first.
4. Investment solutions – both financial advisers and wealth managers will potentially offer financial model portfolio building strategies with different risk ratings, though wealth managers will likely offer a more bespoke service focused on your key investment goals, monitoring and managing the risk to fit your needs. Financial advisers will make investment recommendations either on individual funds, via fund supermarkets or on their own standard model portfolios, which could well fit your goals and help meet your needs.

Don’t forget fees

One other key consideration is fees.

The cost of financial advice or wealth management varies so it’s important you ask the firm how much their fee is, how they intend to take their fee, what service level you receive for it and how the fee will impact the value of your investments.

Fees can be charged on advice given and/or on an ongoing annual basis. These tend to be in addition to the separate fees that will be levied for the management of investment assets. Investment managers increasingly offer financial planning advice to complement their principal portfolio management services, so the line between IFAs and wealth managers is becoming blurred.

The key thing to find out is ‘who actually manages my money’ i.e. who is finally responsible for the underlying risk that is being taken on your behalf.

James Johnsen is a director at Church House Investment Management